What is a Debt Repayment Agreement?

Being owed money can be highly stressful for any business. However, there are many options to help you recover the money you are due. One of the most informal and practical options is to agree and sign a Debt Repayment Agreement with the party owing you money (the debtor). This article will outline a Debt Repayment Agreement and how it can benefit your business when you are due payment.  

Options For Recovering Debt

Whilst being owed debt can be very unsettling, you have various options – both legal and practical. Legal options include writing a letter to the debtor asking them to pay and bringing court proceedings to claim the debt. You can also ask solicitors to write to the debtor on your behalf, threatening court proceedings if they do not pay. However, legal options can be costly and sometimes disproportionate depending on the level of debt. 

It’s always best to try more informal ways to pursue the debt, for example, by talking to the debtor and agreeing on a way forward. Taking the debtor to court should always be the very last resort. You should write to the debtor asking for payment and keep an audit trail of your informal efforts to recover the debt. 

One of the most effective ways to recover the debt is to agree on repayment terms with the debtor and formalise them in a written agreement.

Debt Repayment Agreement Example

Suppose you have a great, long-standing business customer to whom you’ve provided services for years. The customer has recently hit financial difficulties due to the current economic climate, meaning they have run into their own cashflow problems. Unfortunately, they cannot afford to pay a hefty invoice, which has been outstanding for a while. 

You want to support your customers and maintain the strong relationship you have built. So, you have an open conversation about how they can pay the sums owed. 

The customer promises that they can pay you all the money over months in smaller amounts. So, rather than threatening your customer with legal proceedings, you take a pragmatic approach and agree on a plan for them to pay you the monies gradually. 

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Once you have agreed on the key terms, you should document them formally in a ‘Debt Repayment Agreement’. This agreement will set out details on the debt settlement by the customer and provide a clear strategy for recovering the debt. 

Debt Repayment Agreement Terms

Your agreement should cover various terms, including at least the following:

• the amount of debt owed;
• a repayment schedule setting out when instalments of the debt are due; 
• consequences for failing to pay the debt; and 
• whether any interest will accrue if regular payments are not made on time.

A Debt Repayment Agreement can benefit you in several ways. Signing this agreement will allow both parties to agree on clear rules about the debt payment and give you certainty. It will both help you avoid needing to take legal action and allow you to maintain your business relationship.  

Upon signature of the agreement, the debtor must comply with its terms. For example, if they fail to make monthly payments, you can enforce the terms and take further action, e.g., potentially bringing a debt and breach of contract claim against them. 

Key Takeaways

There are various debt recovery options you can pursue when someone owes money to your business. The first step should always be attempts to recover the debt informally. This can help you maintain strong business relationships and save time and costs.  

You can talk to the debtor and informally agree on terms on which they will be able to pay back the debt over a period of time. You should then document the terms agreed on in a Debt Repayment Agreement. Hopefully, the debtor will pay the debt on the terms you have agreed, and you can avoid having to take legal action against them. 

If you need help recovering debt, LegalVision’s experienced dispute lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.